US probing possible airline collusion that kept fares high
WASHINGTON (AP) — The U.S. government is investigating possible collusion among major airlines to limit available seats, which keeps airfares high, according to a document obtained by The Associated Press.
The civil antitrust investigation by the Justice Department appears to focus on whether airlines illegally signaled to each other how quickly they would add new flights, routes and extra seats.
A letter received Tuesday by major U.S. carriers demands copies of all communications the airlines had with each other, Wall Street analysts and major shareholders about their plans for passenger-carrying capacity, or "the undesirability of your company or any other airline increasing capacity."
The Justice Department asked each airline for its passenger-carrying capacity by region and overall since January 2010.
Justice Department spokeswoman Emily Pierce confirmed Wednesday that the department was investigating potential "unlawful coordination" among some airlines. She declined to comment further, including about which airlines are being investigated.
On a day when the overall stock market was up, stocks of the major U.S. airlines plunged 3 to 5 percent in the minutes following news of the investigation.
"We received the letter and are complying," United spokesman Luke Punzenberger said Wednesday. Other major domestic carriers had no immediate comment.
Some Wall Street analysts argue that to remain financially strong, airlines should not expand capacity faster than the U.S. economy. And from January 2010 to January 2014, they didn't.
In that 4-year period, capacity on domestic flights was virtually flat while the U.S. economy grew about 2.2 percent per year. From January 2014 to January 2015, however, the airlines expanded by 5.5 percent, topping the economy's 2.4 percent growth for 2014.
Thanks to a series of mergers starting in 2008, American Airlines, Delta Air Lines, Southwest Airlines and United now control more than 80 percent of the seats in the domestic travel market. During that period, they have eliminated unprofitable flights, filled a higher percentage of seats on planes and made a very public effort to slow growth in order to command higher airfares.
It worked. The average domestic airfare rose 13 percent from 2009 to 2014, when adjusted for inflation, according to the Bureau of Transportation Statistics. And that doesn't include the billions of dollars airlines collect from new fees: $25 each way to check a bag and $200 to change a domestic reservation. During the past 12 months, the airlines took in $3.6 billion in bag fees and another $3 billion in reservation change fees.
All of that has led to record profits for the industry. In the past two years, U.S. airlines earned a combined $19.7 billion.
This year could lead to even higher profits thanks to a massive drop in the price airlines pay for jet fuel, their single highest expense. In April, U.S. airlines paid $1.94 a gallon, down 34 percent from the year before.
And that's what worries Wall Street analysts and investors.
Historically, cheap fuel has led airlines to make money-losing decisions. They would rapidly expand, launching new routes and setting unrealistically low airfares to lure passengers. Airlines that already flew those routes would match the fare, and all carriers would lose money.
Such price wars are long gone, but today's low fuel costs along with recent comments from airline executives have given the market jitters.
Airline stocks plunged in May after the chief financial officer of Southwest said at an industry event that the carrier would increase passenger-carrying capacity by 7percent to 8 percent, an increase over an earlier target.
Wolfe Research analyst Hunter Keay, who hosted that May 19 conference, told investors in a note afterward that the big airlines are unhappy to be restraining growth while low-cost airlines like Spirit grow at a much faster pace. He urged the major airlines in a note to investors to "step up" and cut routes for the good of the industry.
"This is a Mexican Standoff. Four airlines with guns pointed at each other. Each is afraid to cut suddenly profitable routes because they fear another will backfill that route," he wrote. "Airlines keep those routes under the rationale that it's good for the long term. This is literally the exact opposite of capacity discipline."
On June 1, Southwest CEO Gary Kelly said his airline would cap its 2015 growth at 7 percent. That sparked a rally in airline stocks, as investors were more assured that capacity growth would be limited.
Keay said on Wednesday that he had not been contacted by the government and doesn't think the airlines have been acting inappropriately.
"The analyst community is bringing up the subject. You certainly can't fault an airline executive for responding to the question," Keay said. "The capacity continues to grow at the airports people want to fly to and air travel remains a particular good value for the consumer, especially for the utility that it provides."
Koenig reported from Dallas, Mayerowitz from New York.
David Koenig can be reached at http://twitter.com/airlinewriter, Mayerowitz at http://twitter.com/GlobeTrotScott and Tucker at http://twitter.com/etuckerAP.